Euro lifted by bets ECB ready to buy bonds

The euro rallied across the board on reports the European Central Bank may purchase more government debt from troubled peripheral nations of the euro zone to stem the region’s banking crisis.

ECB president Mario Draghi is expected to reveal details of the central bank’s bond-buying program after a policy meeting on Thursday.

Bloomberg early on Wednesday reported that the ECB may buy an unlimited amount of government bonds of debt-plagued countries such as Spain and Italy, sparking the euro’s gain. A Reuters report, however, said the ECB’s Governing Council wanted to have some room for manoeuvre on its bond buying to be able to decide spendi ng on a case to case basis.

Nevertheless, the Bloomberg report fuelled buying in the euro against the greenback and commodity currencies such as the Canadian and Australian dollars. The ECB had been expected to be cautious about disclosing the size of its bond buying, given opposition from Germany’s central bank.

Further adding to the rally was a report from Reuters saying that the ECB was ready to waive seniority status on government bonds it buys under the new program, which would mean private investors would not rank lower in any restructuring of euro zone sovereign debt.

“There’s cautious optimism on the eve of a much-anticipated ECB meeting," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

In late afternoon trading, the euro was up 0.3 per cent at $US1.2602, heading back toward a two-month high of $US1.2636 touched on Friday. Traders, however said, volume was light on Wednesday, which may be exacerbating price swings. Analysts were sceptical that the ECB will announce something significant after the Thursday’s policy meeting.

“A question that remained unanswered is whether any new plan by the ECB would be enticing enough for countries to sign up for aid," said Manimbo. “Central bank assistance to ease the debt crisis that comes attached with conditions deemed too severe would dissuade countries from seeking help."

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The euro has risen from a two-year low of $US1.2040 in late July since Draghi pledged he would do everything to preserve the currency, suggesting possible intervention in bond markets to lower peripheral countries’ borrowing costs.

He told European lawmakers on Monday that purchases of short-term sovereign bonds to help debt-burdened countries would not breach European Union rules, according to a recording obtained by Reuters.

The euro rose to its highest against the Swiss franc since May 24. It was last at 1.2044 francs, up 0.3 per cent. Against the Australian dollar, the euro gained 0.7 per cent to $1.2370. The euro zone common currency also climbed versus the Canadian dollar, rising 0.7 per cent to $C1.2482.